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Buy Coal! Deposit Markets Prevent Carbon Leakage

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  • Bård Harstad

Abstract

If a coalition of countries implements climate policies, nonparticipants tend to consume more, pollute more, and invest too little in renewable energy sources. In response, the coalition’s equilibrium policy distorts trade and it is not time consistent. By adding a market for the right to exploit fossil fuel deposits, I show that these problems vanish and the first best is implemented. When the market for deposits clears, the coalition relies entirely on supply-side policies, which is simple to implement in practice. The result illustrates that efficiency can be obtained without Coasian negotiations ex post, if key inputs are tradable ex ante.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-03/cesifo1_wp2992.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2992.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2992

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Keywords: Coase; climate change; carbon leakage; supply v demand side policies; trade policies; the green paradox; and environmental agreements;

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  1. Karp, Larry & Newbery, David M., 1993. "Intertemporal consistency issues in depletable resources," Handbook of Natural Resource and Energy Economics, Elsevier, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 19, pages 881-931 Elsevier.
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Cited by:
  1. B�rd Harstad, 2012. "Buy Coal! A Case for Supply-Side Environmental Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(1), pages 77 - 115.
  2. Kalkuhl, Matthias & Brecha, Robert J., 2013. "The carbon rent economics of climate policy," Energy Economics, Elsevier, Elsevier, vol. 39(C), pages 89-99.

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